Development Through Synergistic Reform

Several studies suggest that production of high-quality output is a precondition for firms in less developed countries to participate in the export market. Institutional deficiencies that raise the costs of entry into high-quality production therefore limit the positive impact that trade liberalization can have on income or growth. Institutional reform that reduces the costs of entry into high-quality production and trade reform therefore have synergistic effects on income and, possibly, growth. In contrast, institutional reform that reduces the costs of entry into low-quality production (e.g., reforms targeted at small businesses) interferes with the impact of trade reform. The model that yields these results is also used to analyze impacts of foreign direct investment and of subsidies to entrepreneurship in the presence of unemployment.